Ban on diesel vehicles – Is this a step in the right direction?

The Indian auto industry has been witnessing sluggish growth in the last few years due to macroeconomic headwinds, high input and finance costs, rupee depreciation impacting both consumer demand and profitability of auto manufacturers.

Just when many of the aforesaid factors were turning benign and the sector began to emerge from the prolonged slowdown, the Supreme Court ban on registration of new diesel cars (above 2000 cc) in NCR till March 31, 2016 has come as a complete shock to the auto manufacturers.

While the environmental activists and auto manufacturers continue to brandish conflicting studies and statistics for and against the efficacy of this ban, the Supreme Court has upheld its earlier decision.

Notwithstanding which side of the debate one stands on, a few things clearly emerge – vehicular pollution will be a topic attracting a lot of attention from policy makers, courts, environmental groups and media; auto manufacturers need to be prepared for sudden policy changes and interventions from executive/ judiciary and there would be political slugfest around such decisions as has been seen around the Delhi Govt’s decision to implement odd/ even scheme.

As things stand today, 23% of the cars registered in Delhi run on diesel, it can be argued that this is an outcome of Govt’s flawed pricing policy of subsidising diesel fuel - the best way to address the issue using free market economics would have been “polluter pays” principle and hence diesel cars and fuel should have been subjected to higher taxes or other monetary disincentives.

The heavier and more polluting commercial vehicles which are still on BS II standards as against cars on BS IV, are not impacted by this ban though an “end of life” scheme for them is also being envisaged

India went in totally the opposite direction by subsidising rich diesel car buyers and all the environmental gains from CNG implementation in Delhi earlier were squandered away. Now in another u turn, an immediate ban, while good intentioned and probably needed from an environmental perspective, has been imposed without any notice period which has left auto manufacturers and their dealers feeling shortchanged.

At the same time, the heavier and more polluting commercial vehicles which are still on BS II standards as against cars on BS IV, are not impacted by this ban though an “end of life” scheme for them is also being envisaged.

What would of course be desirable for the country is to cut through the noise and have an integrated long term strategy to address this critical problem. One of the key aspects would be to develop suitable policy measures to incentivise shift towards cleaner vehicles and for such policy making, let’s look into how other large automotive markets have handled this issue:

· Japan, in 2003, was probably the first one to ban “dirty” diesel vehicles (trucks/ vans/ buses and not the passenger cars) which did not meet emission standards and were aged beyond a specified limit.

This initiative was supported by Govt incentives including loans and subsidies to users for installation of pollution reduction devices, subsidies to oil manufacturers supplying low sulfur diesel fuel, encouraging mass production of particulate matter reduction equipment, incentives to users for scrapping old vehicles etc.

· France, where more than 80% of the cars run on diesel engines has implemented bans on diesel cars beyond a certain age; the thresholds will become stricter in 2020, again supported by govt incentives.

· US has always been primarily a gasoline market which is a relatively cleaner fuel as compared to diesel. Also, emission norms are strictest in the US as has been discovered by VW to its detriment in the latest emission scandal.

The recent shale discoveries in US, slowdown in China and geo political situation in Middle East has meant that oil prices have crashed and are likely to remain benign over the next few years – it could therefore be expected that while US will make small shifts towards electric cars like Tesla, petrol vehicles would continue to have a lion’s share of the market.

· Only 15% of motor vehicles in China run on diesel mainly trucks and buses. Due to environmental concerns, China took early steps towards electric vehicles over a decade ago by building charging infrastructure and Govt subsidies in the form of tax cuts on sale of electric cars. It is expected that China will accelerate shift towards electric cars and auto manufacturers are designing and building electric cars keeping Chinese customers in mind.

With the above experiences, a few ideas merit attention of the policy makers:

1. India needs to follow the China example rather than US or EU and invest serious money in electric cars. The electric car technology globally is developing at a rapid pace and current issues of lower miles on a charge are likely to be addressed by one or more of the global manufacturers. Yes, electric cars would continue to be more expensive than diesel/ petrol cars and hence would need govt incentives but this would be taxpayer money well spent for current and future generations. Incentives could be structured to encourage replacement of old diesel cars by electric cars.

2. “End of life” scheme for commercial vehicles in line with best practices internationally needs to be implemented at the earliest. While there may be arguments for govt subsidies here also for replacement vehicles, in our view it may be better to let this run on free market principles and not have the taxpayer fund these. In any case, the extra costs are likely to be passed on by the buyers to end consumer of goods or services.

3. Stricter emission standards need to be implemented for all kinds of vehicles. The recent announcement by the Govt to fast track BS VI to 2020 is a welcome start but more needs to be done.

4. As is done in countries like Singapore, taxes on private vehicles need to be much higher – not only excise/ manufacturing taxes but also road taxes, parking etc. and funds generated from such taxes can be used to subsidize electric vehicles and infrastructure. Fuel pricing polices also need to incentivise cleaner fuels and disincentives others.

The policy makers need to take a cue from the SC ban, which has been welcomed and riled by experts in equal measure, and develop a long term integrated approach to continue on the path shown by the SC whereby environmental issues need as much attention (and probably even more ) as development.

(With inputs from Somika Agarwal, Senior VP, M&A, BMR Advisors)

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